Radio Shack 2004 Annual Report Download - page 26

Advertising expense increased in dollars and as a percentage
of net sales and operating revenues in 2003. These increases
related to an increase in television advertising, as well as a
decrease in contributions from vendors.
Rent expense increased in dollars for 2003 due primarily to
lease renewals and relocations at higher rates, as well as a
slight increase in the average store size. Rent expense as a
percent of net sales and operating revenues remained the
same for 2003, compared to 2002, due to fewer company
stores and our continued rent reduction efforts.
Insurance expense increased in both dollars and as a
percent of net sales and operating revenues in 2003,
when compared to 2002.
Depreciation and Amortization
Depreciation and amortization expense decreased $2.7
million to $92.0 million and remained at 2.0% of net sales
and operating revenues for both 2003 and 2002.
Gain on Contract Termination
RadioShack and Microsoft mutually agreed during 2002 to
terminate their agreement and settle the remaining commit-
ments each had to one another. The termination of this
agreement took effect at the start of the fourth quarter of
2002, upon satisfaction of several contractual obligations.
The net financial result was an $18.5 million gain (principally
cash received), driven primarily by the settlement of a
multi-year obligation Microsoft had to connect our stores
with broadband capabilities.
Impairment of Long-Lived Assets
AmeriLink was acquired in 1999 to provide us with residen-
tial installation capabilities for the technologies and services
offered in our retail stores. As a result of continued difficul-
ties in the DTH business and a refocus during the fourth
quarter of 2002 on our satellite installation strategy, together
with a revised cash flow projection for our overall installation
business, we determined that the remaining long-lived assets
associated with AmeriLink were impaired. We compared
the carrying value of these long-lived assets with their fair
value and determined that the remaining goodwill balance
of $8.1 million was impaired and we, therefore, recorded
an impairment charge of this amount in the accompanying
2002 Consolidated Statement of Income. As of December
31, 2002, there was no remaining goodwill balance on our
balance sheet relating to AmeriLink. We sold AmeriLink in
September 2003.
Net Interest Expense
Interest expense, net of interest income, was $22.9 million
for 2003 versus $34.4 million for 2002, a decrease of $11.5
million or 33.4%.
Interest expense decreased to $35.7 million in 2003 from
$43.4 million in 2002 primarily as a result of a reduction in the
average debt outstanding throughout 2003. In addition, our
interest rate swap instruments and the capitalization of $2.6
million of interest expense related to the construction of our
new corporate campus also lowered overall interest expense
for the year ended December 31, 2003, when compared to
the same prior year period.
Interest income increased over 42% to $12.8 million in 2003
from $9.0 million in 2002, primarily as a result of a $5.6 mil-
lion increase in interest received from income tax settlements
in 2003, as compared to 2002.
Other Income, Net
In July 2003, we received payment of $15.7 million resulting
from the favorable settlement of a lawsuit we had previously
filed. We recorded this settlement in the third quarter of 2003
as other income of $10.7 million, net of legal expenses of
$5.0 million paid as a result of the lawsuit.
In September 2003 we sold our wholly-owned subsidiary
AmeriLink to INSTALLS inc, LLC in a cash-for-stock sale,
resulting in a loss of $1.8 million, based on AmeriLink’s book
value, which was recorded in other income.
For the year ended December 31, 2003, we received and
recorded income of $3.1 million owed to us under a tax shar-
ing agreement with O’Sullivan, compared to $33.9 million
received and recorded in the corresponding prior year period.
In the second quarter of 2002, we received and recorded
income of $27.7 million in partial settlement of amounts owed
to us under this tax sharing agreement. This partial settlement
followed a ruling in our favor by an arbitration panel. Future
payments under the tax sharing agreement will vary based on
the level of O’Sullivan’s future earnings and are also depend-
ent on O’Sullivan’s overall financial condition and ability to pay.
During the second half of 2002, we received two payments
totaling $6.2 million relating to quarterly payments under the
tax sharing agreement with O’Sullivan.
Provision for Income Taxes
Our provision for income taxes reflects an effective income
tax rate of 36.9% for 2003 and 38.0% for 2002. The decrease
in the effective tax rate for 2003, when compared to 2002,
was the result of a favorable tax settlement related to prior
year tax matters.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RadioShack Corporation and Subsidiaries
24 AR2004